College grads face high hurdles to buying first homes

A previous version of this story misspelled the name of Mark Kantrowitz. It has been corrected.

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Think college was hard? Try buying a house.

The ladder to home-ownership is a lot steeper for debt-laden graduates. They need to earn a lot more money if they want to buy a home — in some cases, over 50% more.

Recent graduates who are saddled with student debt and want to get on the property ladder will have to earn roughly one-third more annually (or $8,969 more, on average) than those who are debt-free, according to new research from real-estate website RealtyTrac.

To reach that figure, RealtyTrac took the median home price for each state and county, and calculated the minimum amount of income that would be needed to qualify for a loan to buy a house at that price. (RealtyTrac assumed a 20% down payment and a 4.13% 30-year fixed loan with a maximum debt-to-income ratio of 43%, which is the maximum ratio for a “qualified mortgage” under Consumer Financial Protection Bureau rules).

“To overcome the additional debt from student loans, indebted college graduates need to make more income than college graduates without student loans to be able to afford a home,” says Daren Blomquist, vice-president at RealtyTrac.

Of course, this also depends on where the student lives. “The average student loan debt varies from state to state and, somewhat counterintuitively, some of the most expensive states for housing also have the lowest average student loan debt,” Blomquist explains. California has one of the lowest levels of student loan debt, for example, but also some of the highest house prices in the country.

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States where recent graduates with student loans need to make even more income to match the buying power of students without loans include Connecticut (58%), Rhode Island (56%), Michigan (55%), Ohio (53%), and Pennsylvania (49%).

States on the other end of the spectrum include California — where graduates with student loans need to earn just 12% more than graduates without student loans — New York (17%), Virginia (17%), Wyoming (19%) and Utah (20%), RealtyTrac found.

On the upside, those graduates with student loans who are already making the median U.S. household income for earners of all ages can afford to make the monthly payments on a median priced home in 96% of the 494 county markets analyzed.

Students who graduate with debt significantly above average are not so typical, says Mark Kantrowitz, publisher of Edvisors.com, a network of websites about planning and paying for college. “The distribution of debt is significantly skewed above the median with a small number of borrowers with excessive debt,” he says. The average starting salary for a bachelor’s degree is around $45,000 — more than the RealtyTrac study suggests, he adds. That said, the average graduate in 2014 has $33,000 in debt, an amount that has tripled over the last 20 years.

Other data suggests that recent graduates with well-paying jobs may be the lucky ones: 40% of unemployed workers are millennials, many of whom are college age or recently graduated, according to a recent analysis of Census data by the Georgetown University Center on Education and the Workforce. That’s a greater share than both Generation X (37%) and boomers (23%) and equates to 4.6 million unemployed millennials, 4.2 million unemployed Xers and 2.5 million jobless boomers.

And graduates with student debt lag do appear to find it more difficult to build wealth: Households headed by a young, college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700), according to recent data from the Pew Research Center. About 1 in 4 households headed by an adult under 40 carries student debt — the highest share on record.

The pressures of student debt can also have a domino effect. Households with student debt accumulate less wealth, in part, because they tend to owe relatively large amounts of other debt, Pew also found. Among college graduates, the typical total indebtedness — including student debt, car debt and credit cards and mortgage debt — of student debtor households ($137,010) is almost twice the overall debt load of similar households with no student debt ($73,250).

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